CUBE Entertainment decided on a capital increase of 6.1 billion won to secure operating funds for developing new artists. Unlike general public offerings or shareholder allocations, new shares will be issued to a third party, with all 430,933 new shares allocated to the employee stock ownership association. The employee stock ownership association is a group that invests in company stock so that employees can purchase shares, meaning the company is receiving investments from its employees.
CUBE Entertainment announced the decision for this capital increase on 25th. The offering price for the new shares is 14,210 won, applying a 10% discount on the benchmark price (the weighted average of the previous month and week before the board resolution) of 15,779 won. Compared to the stock price of 16,420 won on the 26th, the new shares will be issued at about a 20% discount.
CUBE Entertainment has about 150 employees. Even if every employee participates in the employee stock ownership association to purchase shares, each person would need to invest an average of around 38 million won. This is a considerable amount, raising interest in the investment decision process.
Issuing the entire new shares exclusively to the employee stock ownership association is an unusual method of fundraising. Typically, capital increases that allocate new shares to the employee stock ownership association occur through general public offerings. In a public offering capital increase, the allocation of new shares to the employee stock ownership association is limited to 20% of the total number of issued shares. The cap on how much a member can allocate to employee stock is also restricted to the total salary over the last 12 months before the subscription.
In contrast, designating the employee stock ownership association as a third party for capital increases imposes no allocation limits. It is interpreted that CUBE Entertainment allocated the entire new shares to the employee stock ownership association because it judged it difficult to raise all necessary funds through general offerings or shareholder allocation.
Carrying out capital increases through third-party allocation to the employee stock ownership association is not uncommon for CUBE Entertainment. In 2020, CUBE Entertainment raised funds from the employee stock ownership association twice, with amounts of 1.7 billion won and 2.9 billion won in June and October, respectively.
After the capital increase, the company successfully listed the new shares it had promised to issue. This implies that the employee stock ownership association participated in the subscription without any unsubscribed shares. This unusual subscription result is seen as remarkable for a small company.
Some are concerned that this method of securing funds may constitute a violation of insider trading laws, as employees could potentially seek personal profit by leveraging undisclosed information. Although there are safeguards preventing immediate sale due to a one-year lock-up period after acquiring shares, they can purchase shares at a price lower than the market value and make subscription decisions after having been informed due to the nature of being insiders in the association.
Unlike general public offerings or shareholder allocations regulated by the Capital Markets Act, capital increases through third-party allocations regulated by the Commercial Act are originally restricted to achieving business objectives such as introducing new technologies or improving financial structure. Provisions in the bylaws regarding the exclusion of shareholders' preemptive rights must also be separately established because, fundamentally, capital increases are intended for existing shareholders.
Nevertheless, CUBE Entertainment has repeatedly utilized the employee stock ownership association. A securities firm representative noted, "There is no clear criterion for issuing shares to the employee stock ownership association for fundraising, but it is necessary to be careful to avoid unnecessary misunderstandings."
Coincidentally, after CUBE Entertainment conducted two third-party capital increases targeting the employee stock ownership association in 2020, the stock price surged sharply after the one-year lock-up period ended. The members of the association who participated in the capital increase were able to sell their shares between June and October 2021, when CUBE Entertainment’s stock price rose from 11,000 to 12,000 won in June 2021 to 29,000 won by November 2021.
It is estimated that the members of the association who received shares through the capital increase would have made significant capital gains if they had sold their shares immediately after the end of the lock-up period.